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What Do Individual Development Accounts Do? Evidence from a Controlled Experiment

William G. Gale

Abstract

This paper evaluates the first controlled field experiment on Individual Development Accounts (IDAs). Including their own contributions and matching funds, treatment group members could accumulate up to $6,750 for home purchase or $4,500 for other qualified uses. Almost all treatment group members opened accounts, but many withdrew the balances for unqualified purposes. For black renters at baseline, the IDA raised home ownership rates by almost 10 percentage points over 4 years, but reduced financial assets and business ownership. White renters experienced no home ownership effects, but business equity rose. Home owners used the IDA in different ways than renters.

Introduction

Individual development accounts (IDAs) are saving accounts that provide lowincome households with matching payments when the balances are withdrawn and used for special purposes, such as home purchase, business start-up, and investment in education. IDA programs also frequently provide participants with financial education and counseling, as well as reminders and encouragement to make regular contributions. Pioneered by Sherraden (1991), IDAs represent a new approach to helping low-income households that emphasizes both the direct and indirect benefits of accumulating assets. By encouraging saving, IDAs may be more effective than conventional cash and in-kind income-support programs in combating poverty. Even a small amount of saving could be an effective buffer against emergencies or a vehicle for overcoming borrowing constraints and for making investments that have substantial long-term positive effects on life prospects. In addition, the process of saving that IDAs emphasize may in itself promote positive changes in attitudes and behavior.

For several additional reasons, IDAs may also be more effective than conventional tax incentives in encouraging low-income households to save. Contributions to Individual Retirement Accounts (IRAs) and 401(k) plans are rewarded with tax deductions, which are less valuable to low-income households who face low marginal income tax rates than to others. In contrast, IDAs offer generous matching payments that are independent of tax rates and thus do not decline as income falls.1 The financial education and encouragement to save that many IDA programs provide could also spur net saving, independent of any specific subsidy.

In practice, however, the most frequent use of IDAs is to encourage renters to become home owners.2 The encouragement and assistance through a potentially long and complicated home-buying process, and the emphasis on down payments as a preferred use of funds make IDAs a potentially productive way to boost home ownership. In contrast, more traditional public policies guarantee mortgage loans or subsidize mortgage interest rates, but only if a household has already been able to accumulate a sufficient down payment and navigate the home-buying process on its own.


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